• Early this year, the Korean economy was entering a phase of gradual slowdown, as its upward trend until the previous year was coming to an end.
• Under such condition, global credit crunch that has been spread fast after last September produced additional negative effects, accelerating the speed of economic slowdown of Korea.
  - Foreign portfolio investment has been rapidly retrieved during the re-capitalization and de-leveraging process, creating excess volatility in the Korean financial market which is relatively more exposed to foreign investment than other emerging economies.
• In particular, investors are increasingly concerned about the liquidity conditions of Korean banks that have expanded credit at rapid paces for the past 2~3 years.
  - Banks' asset has been growing by 12~13% since 2006, which is much higher than the nominal GDP growth rate (around 6%).

• While the ongoing financial market crisis appears to spread from developed countries to developing countries, recessions in developed countries are expected to take a considerable time to recover.
• The turmoil in the domestic financial market caused by the credit crunch in the global financial market is likely to shrink domestic demand.
• Among the most affected are exports, given that global growth projections have been marked down sharply.

• The prices of oil and commodities, which dropped to almost half of its highest price in the mid-July, are expected to significantly contribute to improving current account and to provide a buffer against a sudden drop in domestic demand.

• After 2000, house prices in Korea registered a rapid rise in some areas, but the degree of nationwide house price appreciation is far smaller than those in the U.S. and developed countries in Europe. The management on mortgage loans has been under relatively strict supervision.
• Though household debt has been rapidly rising since 2000, most of the debt increase was led by the households with high income or wealth, suggesting that the possibility of debt distress is relatively low.
• The overall financial conditions of Korean companies is quite stable, and the delinquency rates have remained relatively low until now.
• The proportion of foreign investment in stock market and the external short-term debt is relatively high, but the amount of foreign reserve is sufficient enough to deal with temporal disturbances in foreign exchange market, and the government has room for fiscal stimulus.

• It is prerequisite that the financial system restores confidence firmly and secure enough cash flow, and the efforts to enhance the transparency of overall financial market should be carried out.
• Additionally, both expansionary fiscal and monetary policies are needed to be implemented for a soft-landing for the economy.
  - Concerns about current economic situation were resulted from a sudden withdrawal of foreign capital, leading to soaring foreign exchange rate. Under this situation, the monetary policy alone may not be sufficient to stabilize the slowing economy.
  - Therefore, until the pressure on the foreign capital retrieval becomes stabilized, it seems appropriate to carry out active fiscal policies to alleviate the burden on the monetary policy.

• In order to achieve a soft-landing, it is desirable to adopt traditional macroeconomic policies such as fiscal stimulus and monetary easing rather than frequent changes in institutional rule or microeconomic policies.
• As for banking institutions which fail to manage its own risks and come to rely on the government aid, it is necessary to impose corresponding penalties upon them as a way to prevent moral hazard.
• During the process of restoring the confidence of banking systems, it should be ensured that the government does not intend to aid all the financial defaults, which is necessary to sustain market disciplines.

• The global growth rate (based on IMF's PPP exchange rate) is assumed to record a mid 2% range in 2009, down from a high 3% range in 2008.

• The won has weakened against most other currencies in the second half of 2008. On the contrary to the 2008's trend, it is assumed to appreciate gradually over the course of 2009 to reach a similar level of 2008's on average for the whole year.

• It is expected that after recording a low 2% growth rate in the first half, the growth rate will increase to a mid 4% range in the second half with credit crunch being alleviated gradually.
• Private consumption is expected to register around 2% after taking a downward pace in the first half of 2009.
  - Until the first half, private consumption is expected to drop due to the inflationary pressure by the rising exchange rate, the falling asset prices and the worsening employment condition. From the second half, however, it is expected that private consumption slowly recovers to the pace of income growth as the effects of the shocks are gradually eased.
• Equipment investment is assumed to register a growth rate of around 2%, as the uncertainty grows due to credit squeeze in domestic financial market and global economic slowdown.
• Construction investment, though a considerable rise in public works such as SOC investment is expected, is forecast to remain around 2% of growth as the recovery in building construction is likely to be delayed.

• Goods account surplus is expected to record around $24 billion, a steep rise from 2008 ($9 ~ $10 billion).
  - As the real export growth (in volume terms) is expected to slow down due to the global economic recession and the export unit price is expected to fall, the nominal export growth (in dollar terms) is forecast to slow to around 3%, a sharp drop from 2008 (around 20%).
  - Due to the wild fluctuations in oil and raw material prices, the imports (in dollar terms) in 2009 are expected to remain at an approximately same level as that of 2008, which rapidly grew by 27~28% from the level of 2007.
• Accounts of service·income·transfers are projected to record a deficit of around $15 billion, down from 2008 ($18 billion), affected by the slowdown in domestic demand.

• With the falling prices of crude oil driving the inflation for the first half of 2008, the prices of imported-goods show signs of stabilization, and the downturn of domestic economy is also expected to ease the burden on demand pressure. Accordingly, the inflation in 2009 is forecast to fall to a mid 3% range.
  - On the other hand, the core inflation, which is not directly affected by oil prices, is expected to record a growth rate of around 4%, higher than the headline inflation.

2008

2009

First
Half^p

3/4^p

4/4

Yearly

First
Half

Second
Half

Yearly

GDP

Private Consumption
Equip. Investment
Const. Investment
Total Exports(Quantity)
Total Imports(Quantity)

5.3

2.9
1.0
-1.2
12.2
8.8

3.9

1.1
4.9
-0.9
9.7
8.9

2.7

0.2
1.8
-0.4
4.9
2.4

4.2

1.7
2.1
-0.9
9.6
7.1

2.1

0.4
1.5
1.8
3.9
3.9

4.4

3.9
2.2
3.3
6.4
6.0

3.3

2.2
1.9
2.6
5.2
4.9

Current Account
(USD 100 million)

Goods Trade Balance
Exports (%)
Imports (%)
Service·Income· 　Current Transfers

-53

45
23.3
30.2

-98

-84

-33
25.1
43.4

-51

56

85
11.5
10.5

-29

-82

96
20.4
27.8

-179

54

129
3.2
-0.6

-75

32

112
3.3
0.7

-80

86

241
3.2
0.1

-155

CPI Inflation
(Core inflation)

4.3
(3.5)

5.5
(4.8)

5.2
(5.1)

4.8
(4.2)

4.4
(4.8)

2.8
(3.3)

3.6
(4.0)

Unemployment Rate

3.3

3.1

3.3

3.2

3.7

3.5

3.6

• However, despite the fact that the extreme turmoil in the foreign exchange market has been alleviated after the government guarantee on payment of short-term foreign debt and the currency swap deal with the U.S., it should be noted that risk factors still remain in the market.

• Although the government's emergency plans are inevitable during the financial turmoil, it is also necessary to reduce the possibility that the policy for financial stabilization could be misused as a way to compensate poor management or investment loss of banking institutions.
  

• It is possible that a substantial amount of defaults is realized in the real estate PF loans of savings banks, but it is unlikely that these defaults will lead to a systemic risk of financial market.
  

• As in developed countries, it is needed to prepare specific measures to tighten the standards for the eligibility of large shareholders of banks. Furthermore, it is also necessary to consider some measures, under which major shareholders and related companies will be supervised as the banks are.
  

• The Act, by allowing flexibility in regulations, can be understood as an improvement toward a direction where a flexible response to financial crisis is made possible.
• However, when adopting the Act, it is thought that measures related to prudential regulation need to be further complemented and reinforced.